You would be hard pressed to find a stock as cheap as Pengrowth Energy (PGH). Not only does Pengrowth trade at a large discount to its book value, but it also offers steady monthly income. The company has several catalysts incoming for its Q2 earnings, namely higher cash flows from elevated energy prices and lower spreads in the quarter. Pengrowth currently offers a $0.04 per share monthly dividend and yields about 9.40%.
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Overview
Pengrowth is an energy producer, with assets mostly located in Western Canada. Pengrowth also owns a large amount of undeveloped acreage. The company's production is slightly tilted towards liquids, at around 55%, with a large chunk of this being heavy oil. During Q1 2013, Pengrowth produced about 89,700 BOE/d.
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Discount to Book Value
Like several other Canadian energy producers, Pengrowth trades at a large discount to its estimated reserve's value. When using a 10% discount, subtracting debt, and dividing by shares outstanding, Pengrowth' reserves are valued at about $8.61 per share as of year end 2012. The value of Pengrowth' reserves is also likely to have increased since, mostly due to increases in energy prices YTD.
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Q1 2013 Results and Q2 2013 Estimates
On May 1, Pengrowth reported its Q1 2013 results. Pengrowth saw production of 89,702 BOE/d, oil and gas sales of $391M, funds flow from operations, or FFO, of $148M, and operating netbacks of $24.77 per BOE. Except for production, I do suspect that Pengrowth will easily top these numbers. The reason being that energy prices were generally higher during Q2 than in Q1. Before I get into the details, let us look at Pengrowth' sensitivity table which provides an estimate for FFO in different commodity price situations:
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In the highlighted section is the range where energy prices were at through most of Q2. This range is from $667M to $755M. Pengrowth' FY FFO guidance is actually $680M, which is within this range. On a per quarter basis, this range would be from $167M to $189M while Pengrowth' guidance is $170M. Using the midpoint of our range, leads us to about $178M, or $8M more than Pengrowth' guidance. This would be a massive $30M, or 20%, improvement from the $148M in FFO in Q1. To determine Pengrowth' other metrics such as operating netbacks and revenues, we will need to estimate several numbers, including Pengrowth' realized price for light oil, the spread for heavy oil, and Pengrowth' realized price for natural gas. Do note that the numbers below do not include the effects of hedges and will assume flat production and equal mix of light oil, heavy oil, and natural gas.
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Natural Gas
Let us start with the natural gas price. The AECO natural gas settlement prices were $3.28 for April, $3.48 for May, and $3.44 for June. This averages out to about $3.40 per MCF. Note that this is a large improvement from the average settlement price of $1.73 for the same period last year. In Q1, the average realized price for Pengrowth' natural gas was around $3.14 per MCF. Pengrowth produced about 245,000 MCF/d, or 40,800 BOE/d of natural gas in Q1, which was 45% of production. Assuming similar production of natural gas in Q2, the increase in prices would increase Pengrowth' revenues by about $5.7M, to about $77.1M.
Light Oil
For light oil, we will need to determine the average spread from WTI during the quarter. Realized prices for light oil has generally increased in Q2 compared with Q1. Using the numbers provided here, average realized light oil prices have increased about 5% to $88.26 per BBL in the quarter. Pengrowth' realized light oil price in Q1 was about $84.06 per BBL and had about 30,438 BBL per day of production. With the estimated 5% increase in light oil prices and assuming equal production, Pengrowth would see revenues increases about $11.5M in Q2 to about $237M.
Heavy Oil
For heavy oil, we also need to determine the average spread between it and WTI. Spreads for heavy crude have improved dramatically this quarter, from an average of $30 per BBL to about $15 per BBL. I will be splitting the difference and will be assuming an increase of about $7.50 per BBL for realized heavy oil prices. Pengrowth' realized price for heavy oil in Q1 was about $50.15 per BBL and production was 7,706 BBLs per day. Again, assuming similar production and no hedges, I expect Pengrowth' heavy oil revenues to increase about $5.2M to $40M.
NGLs
For natural gas liquids, or NGLs, the data on this is rather spotty. NGL prices have been all over the place in Q2, due to ethane rejection and various other factors. Due to this, I cannot make an educated estimate for Pengrowth NGL prices and revenues in Q2 and therefore will assume that they were similar to Q1 levels. In Q1, Pengrowth generated revenues of about $54.7M from NGL.
When adding these up, I estimate that Pengrowth will see Q2 2013 revenues of around $408.8M, up around 4.6% from $390.9M in Q1. This would also lead to revenues per BOE to increase to $50.63, from $48.41 in Q1. Now, when also assuming similar expenses (operating expenses, royalties, and transportation costs) of about $23.64 per BOE, we arrive at $26.99 per BOE of operating netbacks.
Below is a table that summarizes my estimates for Pengrowth' Q2:
| ? | Q2 2013 Estimate | Q1 2013 Actual | Difference | Percentage (+/-) |
| Revenues | $408.8M | $390.9M | $17.9M | 4.6% |
| Operating Netbacks Per BBL | $26.99 | $24.77 | $2.22 | 9.0% |
| FFO | $178M | $148M | $30M | 20.2% |
Below are my estimates for Pengrowth' revenues by production type:
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Conclusion
Needless to say, I expect Pengrowth to post a solid quarter. However, the stock has been essentially flat since March 30, down about 4%. This may have to do with weaker natural gas prices and lingering doubts about the Keystone XL pipeline approval.
Another theory is that investors are worried about funding for the Lindbergh project. The company plans to fund this project with about $1B of asset sales. Pengrowth has already sold about $316M of assets with its Weyburn disposition and has plans to sell another $700M. However, Pengrowth' capex is fully funded for FY 2013 and still it still has time to announce further asset sales.
Pengrowth is a classic paid to wait stock. It offers an outsize 9% dividend yield which is only about 37% of FFO, trades at a massive discount to book value, and has a major growth catalyst in its Lindbergh project, which is anticipated to generate meaningful cash flow by Q4 2014 or Q1 2015.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: I am long PGH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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